Law:

Section:

SECTION 28(i), READ WITH SECTION 43(5), OF THE INCOME-TAX ACT, 1961 - BUSINESS LOSS - ASSESSEE-FIRM WHICH WAS DEALING IN EDIBLE OILS ENTERED INTO MANY CONTRACTS WITH ANOTHER COMPANY, GFM, FOR SUPPLIES - AFTER EFFECTING SUPPLIES PARTIALLY, IT STOPPED FURTHER SUPPLIES DUE TO NON-RECEIPT OF SUPPLIES FROM ITS PRINCIPALS AND ALSO DUE TO HEAVY OUTSTANDINGS DUE TO IT ON SUPPLIES ALREADY MADE TO GFM - AFTER MUTUAL NEGOTIATIONS, ALL CONTRACTS WERE CANCELLED AND ASSESSEE PAID RS. 25,000 TO GFM AS DAMAGE FOR BREACH OF CONTRACT - WHETHER THIS SUM COULD BE TREATED AS LOSS ARISING OUT OF SPECULATIVE TRANSACTION - HELD, ON FACTS, NO Facts The assessee was a registered firm dealing in edible oils. In the relevant accounting year, one of its main customers was GFM, to whom a substantial portion of its goods were sold. There were various contracts for supply of different oils to GFM which were partly fulfilled and partly outstanding during the relevant accounting year. The supplies could not be effected in full by the assessee, since it did not receive adequate supplies from its principals, and also because there were heavy outstandings due to it from GFM for supplies already made. This led to the settlement of the outstanding contract after mutual negotiations on payment of Rs. 25,000 as lump sum damage to GFM. The ITO held that as there was no physical delivery effected and this was not a hedging loss, it was a speculative loss for the assessee. On appeal, the AAC upheld the orders of the ITO. On appeal to the Tribunal, the assessee contended that huge supplies of oil had been effected and at one point of time a sum of Rs. 13,00,540 was due for supplies already made, which made it difficult for the assessee to carry on the business of supplying oils. This payment was claimed to be damages paid for breach of contract and was not a speculative loss. The department contended, that the contracts had been settled otherwise than by delivery, so there was a 'speculative transaction' within the meaning of section 43(5). The Tribunal held that the assessee had committed a breach of contract and agreed to pay a sum to the other party by way of compensation and this was a normal loss…

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